Federal laws concerning tax benefits and limitations for property owners differ according to circumstances, and are subject to change every year.
Whether you own your own home, investment property, or both, it’s important to know how the rules apply to your particular situation before you fill out your federal tax return.
Tax benefits can be in the form of deductions or credits. Deductions reduce the amount of income you owe taxes on. Credits are subtracted directly from the taxes owed. Most real estate-related benefits are tax deductions.
Some tax deductions are available only if you itemize deductions on your tax return, while others can be taken even if you claim the standard deduction.
The Tax Cuts and Jobs Act of 2017 substantially increased the standard deduction, so fewer people find it advantageous to itemize their deductions. But living in a high-property-value area as we do, you may still find that itemizing deductions is advantageous.
Benefits for homeowners include:
• The Mortgage interest deduction, which remains the most popular deduction, despite being modified by the tax bill. Married couples filing jointly can deduct interest on $750,000 of debt on mortgages taken out after Dec. 15, 2017, on their primary residence or second home. Single people and married people filing separately can deduct interest on mortgage debt up to $375,000.
If you took out your mortgage before Dec. 15, 2017, you can still claim deductions on interest for mortgages up to $1 million.
The loan amount for which interest is deducted cannot exceed the cost of the home.
Like most of the tax changes that affect individuals, the revisions to the mortgage interest deduction are set to expire after the 2025 tax year.
Interest on home-equity lines of credit is no longer deductible, unless the funds were used to purchase the property, build a home, or make significant improvements to the property.
• Mortgage insurance deduction. Congress recently extended a provision that allows many folks who pay mortgage insurance (PMI or MIP) on an FHA loan to treat those payments as mortgage interest for the purpose of tax deductions. However, individuals with income over $54,500, or married couples with income over $109,000, may not be able to take these deductions.
• State and local tax deduction (SALT). Deductions for property taxes, as well as state income and sales taxes, are now limited to a total or $10,000 for married couples and $5,000 for individuals and married persons filing separately.
• Closing costs. If you take out a mortgage to purchase or refinance a home, some closing costs may still be deductible.
Mortgage origination fees (sometimes called “points”) that are charged by your lender to set up the loan, sales tax on the transaction, and real estate taxes paid on closing may be tax deductible.
Third-party fees, such as home appraisal, title search, and home inspection, generally are not tax deductible.
Discount points count as advanced mortgage interest payments, meaning you may be able to deduct them, but spread out over the life of the loan, rather than all in one year.
The rules on closing costs related to refinancing are mostly the same.
Homeowners insurance is not deductible on your residence, unless you run a business out of your home, in which case a portion of the insurance may qualify for a deduction.
• Home office deduction. If you are self-employed and work out of your home, you may be able to deduct certain expenses, including a portion of the costs of homeownership. Deductions are based on the percentage of your home’s square footage that is dedicated to your workspace. The rules are complex, however -- the IRS publication that discusses the home-office deduction is 34 pages long – so you probably want to work with a professional tax specialist if you plan to claim these deductions.
• Moving expenses. Moving expenses are no longer tax deductible, except in the case of active-duty military personnel who are moving due to military orders.
• Loss deductions. Deductions for casualty and theft losses are no longer deductible unless the losses were caused by a federally declared disaster, such as a major earthquake, wildfire or flood.
• Home improvements. Most costs of home improvements are not deductible from income taxes – although they may make a difference in capital-gains taxes when you go to sell. “Medically necessary” changes to the property, such as making the house more accessible for a disabled occupant, may be deductible from your income taxes.
• Energy Star credits. Installing Energy Star-compliant items such as solar panels, small wind turbines, geothermal pumps, and fuel cells can get you a tax credit of up to 30% of the cost of the items.
Deductions for landlords and other real estate investors are more complex. Most investors can claim deductions for the following:
• Investment losses. If you sell property at a loss, you can deduct that loss from taxes owed on capital gains. Short-term losses must first be used to offset short-term gains, while long-term losses must first be applied to long-term gains. And if your investment losses exceed your gains for the year, you can use up to $3,000 in remaining net losses to reduce your other taxable income for the year. If there are still losses remaining, you can carry them forward to future years.
• Pass-through income. Taxpayers can now use as much as 20% of income from an LLC, S-Corporation, or sole proprietorship, as well as partnership income and income from rental real estate, plus other specified sources, as a deduction, under certain circumstances.
• Repairs and improvements. The repairs and improvements must be appropriate to the property. For example, you likely would not be allowed to deduct the cost of high-end fixtures on a modest rental home.
• The cost of hiring contractors, property managers, Realtors, and other professionals.
• Marketing costs.
For specifics about how the rules affect your taxes, check out the IRS website, www.irs.gov, or consult a professional tax advisor.
Cher Wollard is a Realtor with Berkshire Hathaway HomeServices Drysdale Properties in Livermore.